Semen Indonesia (SMGR IJ) Sacrifice for the greater good
Maintain HOLD with upgraded TP of IDR14,300. Despite gaining positive momentum SMCB acquisition, we expect temporary hiccups following the consolidation, which will drag down SMGR profitability. Nevertheless, with commendable logistic efficiency and utilization rate, we believe SMGR will find its way out through the transition phase. SMGR is currently trading at FY19 P/E of 27.8x (+2.6 trailing 10-year SD).
Holcim products will drag down SMGR ASP growth.. Following the consolidation in the industry, we expect domestic ASP to increase by 4-5% in 2019. Due to higher utilization rate, we believe SMGR has more pricing flexibility than INTP. However, as Holcim brand will still be marketed by SMGR in 2019, Holcim low ASP base will inevitably limit SMGR room for ASP growth. As a result, we expect SMGR to increase its ASP by only 3%.
&..and also hold back profitability. On the other hand, the existence of royalty fee (6.5% from gross revenue) will also drag down SMGR profitability, despite various efficiency efforts. The decision of when to terminate royalty agreement with Lafarge Holcim remains unclear at the moment, so we assume that Holcim brand will be distributed in 2020 as well.
Expecting logistic efficiency to sustain. SMGR’s geographically diverse facilities will enable SMGR to maintain its logistic efficiency. In 2019, we expect logistic costs shares to total revenue at 6.2%, far lower than INTP’s at 13.5%.
Leverage is still under control post SMCB acquisition. With interest rate of Libor + 160bps in first year, Libor + 175bps in first half of second year and Libor + 200bps in the second half of second year, assuming Libor rate of 2.5%, we estimate the debt financing of SMCB acquisition will incur additional interest expense of IDR746bn in FY19 and IDR796bn in FY20, which will temporarily squeeze net margin. Nevertheless, we believe SMGR leverage will still be in a good shape, as we expect gross gearing to increase from 0.3x in FY18 to 1.1-1.2x in FY19-20, while interest coverage can be maintained within range of 2.2-2.6x.
